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UNIT 1
®
Adventures in AP Economics Videos
Review Mod 1.1 Graphing Tricks & Tips

Mod 1.2 Production Possibilities Curve
Mod 1.3 Comparative Advantage and Absolute Advantage
Mod 1.4 Demand
Mod 1.5 Supply
Mod 1.6 Market Equilibrium

economics by example
The Coffee Market’s Hot; Why Are
UNIT 1 Review Video Bean Prices Not?

Module 1.1

1. Everyone has to make choices about what to do and households , and firms . Macroeconomics is concerned
what not to do. Choice is the basis of economics — if it with the overall ups and downs of the economy
doesn’t involve choice, it isn’t economics. and focuses on economic aggregates, such as the
2. The reason choices must be made is that unemployment rate and gross domestic product, that

resources — anything that can be used to produce summarize data across many different markets.

something else — are scarce . The four categories of 5. Economists use economic models for positive
resources, also called factors of production , are land , economics, which describes how the economy works,
labor , capital , and entrepreneurship . Individuals are and for normative economics, which prescribes how the
limited in their choices by money and time; economies economy should work. Positive economics often involves
are limited by their supplies of resources. making forecasts. Economics can determine correct

3. Because you must choose among limited alternatives, answers for positive questions, but typically not for
the true cost of anything is what you must give up to get normative questions, which involve value judgments.
it — all costs are opportunity costs . Exceptions occur when policies designed to achieve a
certain prescription can be clearly ranked in terms of
4. Microeconomics is the branch of economics that preference.
focuses on how choices are made by individuals,

Module 1.2

6. Almost all economics is based on models , “thought good must be produced if more of the other good is

experiments” or simplified versions of reality, many of produced), efficiency (an economy produces efficiently
which use analytical tools such as mathematics and if it produces on the production possibilities curve and
graphs. An important assumption in economic models is it allocates resources efficiently if it produces the mix of
the other things equal ( ceteris paribus ) assumption , goods and services that people most want to consume),

which allows analysis of the effect of change in one factor and economic growth (an increase in the economy’s
by holding all other relevant factors unchanged. maximum possible output shown by an outward shift

7. One important economic model is the production of the production possibilities curve).
possibilities curve , which illustrates the trade-offs 8. There are two basic sources of growth in the production

facing an economy that produces only two goods. The possibilities curve model: an increase in resources and
production possibilities curve illustrates three elements: improved technology .
opportunity cost (showing how much less of one

Module 1.3

9. There are gains from trade : by engaging in the trade countries. Having a comparative advantage means that
of goods and services with one another, the members you can make a good or service at a lower opportunity
of an economy can all be made better off. Underlying cost than everyone else. This is often confused with an
gains from trade are the advantages of specialization , absolute advantage , which is an ability to produce more
of having individuals specialize in the tasks they are of a particular good or service or to use fewer resources to
comparatively good at. produce a particular good or service than anyone else. This
10. The existence of comparative advantages explains confusion leads some to erroneously conclude that there

the source of gains from trade between individuals and are no gains from trade between people or countries.

56 Macro • Unit 1 Basic Economic Concepts
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